Monday, July 13

When a no vote to austerity actually means yes.

I noticed the Greek PM, who initially gave the impression
prior to the referendum he was willing to make some overtures to his lenders to
their austerity measures, has now moved to position where most, if not all of the prior
measures on that table are now accepted or are acceptable in a slightly
modified version. This news initially caused world stock markets to positively
move upwards in anticipation of a final settlement, only to wane as it now
appears a long way off.

The PM, it seems to me, gave the impression that a NO vote
would strengthen his hand and at the same time by making a few overtures gave voters
the distinct impression that creditors are being unreasonable and not
responding to his offers. The vote was not as close as most anticipated, but I
gather many, due to the wording, were not clear as to what they were actually
voting for. The only major austerity measure that is now off the table as far
as I can gather is a cut in defense spending. The other point in regard to a haircut
on Greek debt is still in the melting pot, but sooner or later it will have to
be considered.

There seems to be a great deal of confusion talked about
the position right from the outset. The continuing theme the European Creditors
are to blame for imposing austerity measures which resulted in Greece’s economy
contracting by about 25% is a popular theme talked about by economists. But the
reality is if you clock up debts to the extent of allowing run- away government
expenditure to result in a budget deficits of the order of 12% of GDP, most of
which was for consumption expenditure, you will in the aftermath risk severe
contraction bringing that back into equilibrium.That inevitably must cause a contraction in
any economy in the absence of offsetting stimulatory monetary policy, which in Greece’s
situation was long since exhausted as a Eurozone member. Furthermore, whether in modernity or way back to the times
when communities were more in tune with nature, some semblance of balance has
to be always maintained between continued sustainable available resources and those
consumed. The assertion by some economists that the Greek people have not
received or benefited from the continuing bailouts is another popular theme which
is at odds with reality.

If Greece had not been bailed out in the past their economy and
their people would have suffered far more, as the reintroduced drachma would have
devalued and ratchetted up inflation by 30-40% to reduce the countries
purchasing power. Benefits across the board would have to be cut and with rapid
inflation those provided would be severely devalued. Whilst some of the funds provided did end up as
financier’s remuneration the vast bulk of funds were as a consequence of prior consumption
expenditure exceeding tax revenues which was received one way or another in benefits
or services by the Greek people.

The idea put forward by another leading economist that the
economy would quickly recover in the event of a Greek exit , based on prior empirical studies,
to me seems fanciful. Rather I would suggest , this would involve a prolonged period
of poverty, particularly as the countries needs new investment not likely to be
forthcoming where there is little by way of viable industries or infrastructure other than tourism.

As negotiations drag on the initial euphoria and misplaced
satisfaction of a NO vote only highlights the underlying frustration with
Greece. What this highlights as a consequence of months of fruitless talks, is an emerging lack
of trust and a lack of reliability which makes compromise much more difficult. In the current talks I understand the 2 largest creditor
nations, namely Germany and France are taking different approaches. France is
lobbying for Greece to stay in the Eurozone, whilst apparently Germany is
proposing a temporary "Grexit" which might last up to 5 years.

Bear in mind if a settlement can finally be reached it
will be Greece's third bailout in just five years. Its debt now stands at around
320 billion euros ($357 billion) – representing 180 percent of the country's
annual GDP. This is clearly not sustainable.

4 comments:

It has all become so very wearisome. I would suggest that (a) Departure from the Eurozone would not necessarily mean departure from the European Union. (It's all about political choice, there being no scientific laws at risk). (b) Any threat to the integrity (take that word as you will) of the EU is more likely to become real as a result of disagreements between France and the East European states, not a Grexit. (c) Greece leaving the Eurozone might just stop the endless talking and introduce a modicum of reality into the whole business. Temporary exit for five years? Let's make that fifty years!

From much of what I've read about the Greek financial mess these past weeks and more my chief conclusion is that Greece was never qualified in the first place to be a participant in the Euro. All that aside (and Goldman Sachs maneuvering also) the fact is they did join and, along with everyone else, enjoyed the benefits for a time. The voters decided 'no' to the austerities but 'yes' to staying with the currency - what a mess. As usual events continue to overtake our interim conclusions and Tsipras has given in to the demands of the Troika. You might enjoy David Dayan's overview in this article I read today.

thanks Susan - I agree that Greece was never qualified in the first place to be a participant in the Euro. It is also true events continue to overtake our interim conclusions. On the re-negotiated deal the PM has ruled in more measures than previously were on the table and no doubt will need to rely on opposition parties to get the measures through parliament. Thanks for the ref- yes Germany has benefited from a lower exchange rate as the Euro is lower because of continuing concerns over Greece which gives her exports a boost. So there is something to loose in the event of a Greek exit. But as the largest creditor nation who has effectively kicked in 100 billion Euro odd its citizens probably also have an entirely different slant on things. best wishes

About Me

I have worked in the roles as Company Secretary or Divisional financial executive with larger Australian based multinational companies before changing careers in favour of sales and marketing for the latter 12 years of business life.
My particular interests include corporate social responsibility, ethics and research into more sustainable business practices.
I am a fellow of CPA Australia and an Associate member of the Governance Institute of Australia which was previously called the Chartered Secretaries Australia. I am chairman of the Malawi Support group who are a small group of catholic parishioners who raise funds to support a sister parish in Malawi.